Our startup is in the process of getting acquired and the buyer is promising a SPAC to happen at an unrealistic valuation

[enidan]

Hi fellow Entrepreneurs,

We are a small 3 person fin tech startup solving a very niche problem and one of our existing customers has offered to acquire us.

All of us are only getting shares in the acquiring company and they have managed to ease our anxiety of not receiving any cash by telling us that that they are working with a few investment banks to merge with a SPAC in the coming months.

Question: They have offered me X number of shares with a $ value of 7 million, assuming their valuation is 1.4 billion.

However, I’m confused about what are their chances of actually being worth that much ?

Does a SPAC guarantee to raise 1.4 billion ? Or is this the valuation after they start trading or hope to achieve ?

When I asked their finance person this question, they mentioned that the company is making 120 million in revenue and an 11.6x valuation (1.4 B) is not unrealistic.

Has anyone here gone through something similar ? Is this really possible to achieve 11x valuation ? I’d love to receive any suggestion or guidance around what I should be doing before i sign the dotted line.

 

[chiemadec]

@enidan We were offered a similar deal and after researching and consulting more, it became very clear that only the top few participants in a SPAC fare well.

This as a tactic by spac-seeking companies to make their portfolio more appealing to attract the spac.

Any deal where you don't get something on day 1 is sus.

 

[pugnodei]

@chiemadec That last line is the real message

 

[613jono]

@pugnodei Couldn’t agree more. Space are like a nice idea on paper but fail in practice sort of thing.

 

[andrew6297]

@enidan 11-12x isn’t irrational if they are growing decently and have good gross margins. However the SPAC market is basically dead at the moment. Basically you sign an acquisition agreement at a valuation, then you try and sell that valuation to PIPE investors (usually comes down or gets structure) then you take the PIPE cash and escrowed cash the SPAC raised (less redemptions) and de-SPAC or go public. We nearly de-SPAC’d a large company late last summer. Basically the PIPE market fell apart which is what actually delivers the cash in a SPAC (other than what is in trust). Subsequently the SPAC market has fallen apart - redemptions were about 10-30pct last year in the good times - now they are like 80pct which isn’t tenable (basically investors in the SPAC demanding their money back based on what was acquired).

You can’t rely on a SPAC in current market conditions. We have that company i mentioned going regular way IPO now - so the feedback is current (a week ago conversation) actually from Barclays and Citi’s equity capital markets teams.

 

[graciedog]

@andrew6297 This!

I’d also add that some these things are really hard to predict. The challenge you’ll have being rolled up into a big company is your ability to influence outcomes and decisions. You’ll lose control over your destiny and put it in the hands of a management team that either has a great track record and knows what they’re doing, or a management team that’s trying to figure it out as they go. If you’d walk through hell and back with the acquiring management team and you believe in the product and see the growth potential of the roll up, getting stock could be more valuable than cash. Typically, companies with super valuable stock would rather pay for acquisitions with cash vs stock because the believe their stock is undervalued. They buy you with stock when they think/know their stock is overvalued. There’s obviously other considerations but this is a good rule of thumb.

Tech has been hammered in the public markets in the past month. It’s likely we’ll see the private markets also reset somewhat. Multiples could come down. If you don’t have the revenue growth numbers it could get rough.

 

[613jono]

@graciedog Couldn’t agree more. I company i work for just did this. They didn’t get a payday and they didn’t understand they went from working for themselves to working for a board and it’s shareholders, oops.

Research a lot and go in with knowledge in hand before signing.

 

[jaxxi]

@enidan Don’t walk, run. Only stock is a zero trust offer and is a bet to win big or not pay debits.

 

[lianap]

@enidan Ive learned the hard way, and you will to. All buyout deals are cash, upfront, or you can fuck off.

 

[col1]

@lianap Just to be clear, I'd be suspect of any deal where they offer you 100% of the cash upfront.

No buy-side M&A lawyers will agree to give you all of the cash at close – you'll have earnout targets for most likely 1-3 years

 

[knr80]

@col1 Plenty of PE deals don’t involve earn outs from what I’ve seen

 

[lianap]

@col1 Thats fine. Then they aren’t buying one of my businesses. Earn outs make no sense, it is not on me to pay for the buying company fucking up running a previously well running company. Any deal I do is cash only upfront, its non-negotiable. If they don’t agree to it up front as well, there is no reason to even begin buyout talks.

 

[col1]

@lianap How many companies have you sold?

Granted I’ve only been on the sell side for one $35M deal, but every single deal I’ve seen (roughly 10-15) all had earn out metrics and retention payouts. Our M&A bankers said they always see earnouts except for small $$$ deals or those with low multipliers

 

[lianap]

@col1 Ive sold 2 so far. People take earn out because they don’t demand cash. Business buyouts are a two party agreement, build good businesses and you can demand whatever you want out of them. Businesses that are failing or not growing any more take what they are offered. Optimizing for growth only works as long as you are growing. Otherwise optimize for profit and you don’t have to care what anyone wants.

 

[col1]

@lianap You can say that, but a generic statement about value or negotiating doesn’t mean much in the real world.

Our company had all cash offers that ranged from $15M to $30M. The company with the highest offer is a > $100B company. Their M&A legal team is larger than our company. Some things are worth negotiating, others aren’t.

If you look at any of the recent very large acquisitions (using RedHat as an example), there were 100% earn our clauses. They’re easy to track - when does the old CEO leave

 

[childofgod101]

@lianap Its true the more I learn about VC and Term Sheets, the less interested I am.

 

[leandrocarvalho29]

@col1 Agreed. Most can be a lot of cash upfront but if buyers aren’t holding something back, they are either silly or not afraid of risk.

 

[siesaw23]

@col1 I'm not sure that's true. At least it wasn't in the case I was involved with where an investment fund bought up several companies to form a larger entity. All cash. They've probably spent at minimum 200+ million in the past years on acquisitions.

 

[ontheway27]

@enidan A customer is now gaining the ability to control a product their competitors would like to have?

They are paying exactly zero for this?

If they lose interest in this they lose what, nothing?

Interesting.

If you would like a counter offer I will take all your shares, and in exchange I give you shares that I promise are worth 1 trillion dollars; if I can get the fur from a yeti. Make sure that after I have given you exactly nothing, I will then take all the profits and any money in your bank account.

 

[ivry321]

@enidan Look at OWLT.

Was doing 120mil a year too, went SPAC at 1.2bil valuation. Less than 6 months later it's now worth 200mm. Almost 85% loss in less than six months.

SPACs are nothing more than a scam imo.